Cost Segragation Study

9 Replies

hello all

i researched the cos seg issue. i think its too much of a hype. basically it all comes down to accelerated depreciation. eventually you will pay it back as time progresses or when you sell the building. however, the cost seg report is not a cheap one do to. so net - you lose over the long run.

You got it wrong my friend

It's not just hype

It's called the net present value of money

$100 today is not the same as $100 in 39 years

if you're not doing this and you qualify you're leaving too much money on the table must be nice to be in that position mr. musk😘

Originally posted by @Sarah Waterman :

You got it wrong my friend

It's not just hype

It's called the net present value of money

$100 today is not the same as $100 in 39 years

if you're not doing this and you qualify you're leaving too much money on the table must be nice to be in that position mr. musk😘

 It is not black and white. On a larger multifamily or commercial property, I agree that cost segregation may make sense. On a smaller inexpensive property, the cost versus benefit may not make sense. It also highly depends on your tax situation. By accelerating, you are assuming this years tax burden it worse than future years. You are shifting taxes, not avoiding them. Tax rates will increase in the future, so that needs to be considered. Just the act of accelerating depreciation will increase your taxable income in future years. 

The other consideration is that hardly anyone holds a rental property 39 years. You may be accelerating tax benefits into lower income years, then sell the property in a higher income year. This will result in a large tax burden. Cost segregation accelerates depreciation, so it increases the amount of taxable recapture when you sell. It also decreases the depreciation expense in future years, which increases taxable income in future years. 

Of course someone will say, just keep exchanging to bigger properties and you will never have to pay taxes. This has its own limitations. You are transferring basis, so there is less depreciation to claim on every new purchase. That "tax snowball" you are pushing up hill keeps getting bigger and bigger. 

You can have a situation where you accelerated more depreciation than you have in equity/value. That means if you sell, your net proceeds could be less than taxes owed after depreciation recapture. In this case, you are forced to hold the property, exchange into another property or come up with money to pay the taxes. I know "hold forever" is the easy answer, but life happens.

I am a firm believer in doing the math. Look at the actual benefit versus cost. Consider how long you plan to hold the property. Make sure you set aside extra money in future years for taxes.

@Aaron Natalie

Speak to your CPA on whether a cost segregation will benefit you.
If it doesn't benefit you, you may be better off not spending the money on the cost segregation company.

Also, there are two types of cost segregation companies.

DIY and engineered studies

I normally recommend DIY studies for residential properties below a certain dollar amount
Engineered studies for other asset classes

Best of luck!